An Economic Model for 21 st Century Hong Kong

1. An Economic Model for 21st Century Hong Kong Speaker: Mrs. Regina Ip Chairperson of Board of Governors, Savantas Policy Institute 08/12/2006 Savantas Policy Institute 1

2. Former Governor Patten’s Predictions in 1992: • By 1997, our GDP per head will have reached US$ 30,500, comparable to Italian and Dutch national income levels today, and within 12 percent of France; • The value of our total foreign trade will be US$ 548 billions, equivalent to the total external trade of France today, and substantially more than that of Italy and the Netherlands; 08/12/2006 Savantas Policy Institute 2

3. Per capita GDP of selected economies Source: Government Economist K. C. Kwok 08/12/2006 Savantas Policy Institute 3

4. Hong Kong’s restructuring driven by: • Information technology – driven global economy • Rise of China as economic superpower Current development of Pu Dong(浦東), Shanghai 08/12/2006 Savantas Policy Institute 4

5. Today’s economy is “bit-driven” • Value added comes from new ways of organizing bits of information in formulas, software code, and images and less from the physical manipulation of materials to make tangible goods. Peter B. Evans, UC Berkeley 08/12/2006 Savantas Policy Institute 5

6. Characteristics of the Political Economy in the Digital Era • Knowledge, particularly theoretical knowledge, is essential to contemporary economy • Distinctive form of organization emerging in the digital era – the learning organization (distinct from traditional categories of craft, Taylorist, or lean production) John Zysman, UC Berkeley 08/12/2006 Savantas Policy Institute 6

7. Twin drivers of change – global and digital: • Wintelism (Windows operating system and Intel processors) • Cross national production networks (CNPNs) John Zysman, UC Berkeley 08/12/2006 Savantas Policy Institute 7

8. CNPNs foster the following changes: • Disintegration of the industry’s value chain into constituent functions that can be contracted to independent producers • Permit an increasingly fine division of labor • Wintelism – chip-based systems given functionality by software – core skills shift from mechanical to electronic John Zysman, UC Berkeley 08/12/2006 Savantas Policy Institute 8

9. CNPNs + Wintelism • Commodification of production • Modularization – constituent elements of product become modules and production becomes modularized as the knowledge about the elements and connection becomes codifiable • Value resides in intellectual property (IP) based monopolies or standards 08/12/2006 Savantas Policy Institute 9

10. China’s Economy Tomorrow • Current per capita GDP US$ 1,730 • By 2025, China’s aggregate GDP to exceed the then aggregate GDP of Japan • By 2040, aggregate Chinese GDP may reach the same level as aggregate US GDP; per capita GDP lags Prof. Lawrence Lau, Vice-Chancellor, The Chinese University of Hong Kong 08/12/2006 Savantas Policy Institute 10

11. Guangdong restructures and upgrades • Its economy during 10th 5-year Plan: Trends toward “heavy-industrialization”, “digitization” and replacement of labor-intensive industries by capital-intensive industries • In future, it moves away from heavy reliance on externally-owned IP assets, entailing heavy expenditure on royalties on proprietary technologies, components and brands • Accelerate “upgrading” of economy, i.e. increase value-creation Prof. Feng Bangyen of Jinan University 08/12/2006 Savantas Policy Institute 11

12. Guangdong’s New Economic Model Under 11th 5-year Framework • Change existing growth model • Enhance “autonomous innovation” capability • Move toward internationalization and innovation of organizational structure • Foster balanced urban and rural development • Build green Guangdong • Promote harmonious social construction 08/12/2006 Savantas Policy Institute 12

13. Impact on Hong Kong • Accelerating infrastructural development (ports and airports) in the mainland affects Hong Kong’s position as a transport and shipping hub • Migration of low value-added, labor-intensive, environmentally polluting industries puts strains on demand for Hong Kong’s trade-related and logistics services 08/12/2006 Savantas Policy Institute 13

14. Innovation Brand The Value Hierarchy (B.M.) Intellectual Property (IP) 50% Applications (Mkt. & Standards) 40% System Integration (Archit., …) Values/Profit Margins 30% Engineering (Design, ODM,..) Outsourcing Trend Manufacturing (Process, OEM) Consumer recognition Core competency Source: Savantas Policy Institute 08/12/2006 Savantas Policy Institute 14

15. Prerequisites for Hong Kong’s Continuous Robust Development in 21st Century • Reposition itself in global value-creation chain • Reposition itself in China’s development generally and that of Guangdong specifically 08/12/2006 Savantas Policy Institute 15

16. To compete successfully in digital, global economy, Hong Kong must • identify new, clear strategies for creating value • distinguish between strategies for creating products, commodities, and differentiated assets (which create the basis for premium price, distinctive sales advantage, or cost advantage in production or distribution) 08/12/2006 Savantas Policy Institute 16

17. Creation of Differentiated Assets hinges on: • Branding and design • Experiments in new business strategies (branding, design, versioning, production re-organization and knowledge management) • Digital approaches to segmenting the market and then attacking specific segments with functionally varied, and for the most part distinctively branded products • Digitally rooted online sales and marketing and supply chain management 08/12/2006 Savantas Policy Institute 17

18. Government actions required: • Provision of talented, trained, educated, skilled people and centers of technology development and diffusion • Provision of necessary infrastructure (both physical and digital) that connects Hong Kong to Mainland China’s and world markets • Reconfiguration of packages of social protections to support experimentation and adjustment 08/12/2006 Savantas Policy Institute 18

19. Thank you very much ! 08/12/2006 Savantas Policy Institute 19

20. Question & Answersession 08/12/2006 Savantas Policy Institute 20